To work with Europe, Iran may need to deal with China

A new Bloomberg report takes a closer look at the staggering success of Chinese outbound M&A activity in 2016. As the year comes to a close, Chinese companies have made acquisitions valued at USD $207 billion, most notably taking control of major European corporations such as German robotics company Kuka and the appliance division of US giant General Electric.

 Further announced deals include ChemChina’s planned USD $43 billion acquisition of Swiss chemicals company Syngenta, which will be the largest ever Chinese M&A transaction if antitrust regulators give approval. Some major acquisitions did not go through, such as Anbang Insurance group’s attempted takeover of Starwood Hotels and Resorts. The Financial Times front page on Tuesday led with a report on how “Western resistance” to Chinese deals has prevented an additional USD $40 billion in acquisitions this year.

China has long sought to boost its global economic footprint through the acquisition of blue chip companies in the United States and Europe. Western governments, regulators, and investors once balked at the overtures, worried about notorious Chinese government intervention in corporate affairs. But as Bloomberg reports, the recent wave of successful acquisitions suggests that China has improved its ability to reassure key stakeholders and to demonstrate the commercial value of its acquisitions.

For Iran, this wave of acquisitions should be watched closely. Iranian officials and business leaders have long been skeptical of partnerships with Chinese firms, and the partnerships that have gone ahead have a mixed record of success. As Emma Scott writes in a report for Middle East Institute, a Washington think tank, “Chinese groups doing business with Iran charged higher prices and were slow to deliver” during the sanctions period of limited competition. “This behavior tainted the image of the Chinese among Iranian customers, who had little choice but to use Chinese products, which had a quality inferior to those made in the West.”

As Najmeh Bozorgmehr has reported, Chinese companies and products “lost luster” as the prospect of sanctions relief grew more likely. Scott believes that the strategy behind China’s investments in Europe and the US will mean a relative decrease in the volume of direct investment in Iran. She writes, “China’s investment destinations are changing from resource-rich developing countries to developed countries capable of providing access to advanced technologies, established brands, and extensive industry experience… Thus, even considering Iran as an emerging market does not bode well for China’s future investments in Iran.”

A recent report from US investment bank JP Morgan analyzes the changes in China’s M&A focus. Whereas between 2005-2010, most M&A activity was focused on energy (54%), industrials (26%), and financial institutions (18%), in 2016, a new mix is visible. Industrial now leads (51%), while telecommunications (18%) and consumer/retail (12%) have emerged as new areas of focus. If this mix remains the sector focus for outbound M&A, the likelihood of Chinese ownership of Iran’s Western trade partners will increase, as industry, telecommunications, and consumer sectors are perhaps the most dynamic sectors for post-sanctions trade and investment in Iran.

In some ways, the Chinese experience in Iran may have been instructive as to the value in acquiring European firms. Iranian insistence on Western technology and expertise over promised Chinese affordability would have been yet another indication to the Chinese that they could never become globally competitive on price alone. The Chinese push to promote domestic innovation in consumer and industrial technologies is now being complemented by a push to acquire world-leading firms, which are typically based in the US and Europe. These acquisitions give the Chinese access not only to new technologies and knowhow, but importantly to trusted Western brands. For example, the acquisition of Sweden’s Volvo passenger car company by Geely automotive in 2010, enabled Geely to tap into Volvo design capability, lending greater credibility to its own ambitious growth plans.

The irony for Iran is that it resisted working with Chinese firms, only for Chinese firms to acquire several European companies that have been long-standing trading partners or have shown interest in post-sanctions market entry. These acquisitions include companies from nearly all the European countries that Iran counts among its trading partners.

China’s largest target acquisition to date, Swiss firm Syngenta, is world leader in agrochemicals. The company has been a long standing supplier to Iran’s agricultural industry. Also in agribusiness, Chinese state-owned food group, COFCO, had sought to acquire Glencore’s agricultural unit in 2015, only to be rebuffed. Undeterred, COFCO completed its 100% takeover of grain trader Nidera in August of this year. The Dutch firm, which ships roughly 3 million tonnes of grain and vegetable oils to Iran annually, is seeking to grow its marketshare.

One of the most pressing infrastructure development needs in Iran is the upgrading of the country’s airports. French firm Aeroport de Lyon has been connected with airport development deals in Tehran and Mashhad, with Chinese financing as part of the package. Such cooperation became possible as Chinese firms took on ownership positions and management contracts in French airports, including a 49% stake in Toulouse airport acquired in 2014.

Italian tire manufacturer Pirelli has been connected to joint-ventures in Iran. The company was acquired in 2015 by ChemChina, the same company targeting Syngenta, in a USD $7.7 billion deal.

In Germany, China’s BAIC Motor, which produces Mercedes Benz models in China, is seeking to buy a stake in Daimler, to complete a cross-shareholding first proposed last year. Daimler is pursuing new deals with Iran Khodro (IKCO) to manufacture both commercial vehicles and passenger cars.

Automation upgrades to Daimler’s IKCO manufacturing lines in Iran would involve replacing the existing Kuka robotic arms with a newer generation. Kuka, a major supplier to Daimler worldwide, was acquired by China’s Midea Group in a USD $5 billion takeover completed this year.

The list is bound to grow.

The prospect of ultimate Chinese ownership at many of Europe’s leading industrial firms poses both an opportunity and a challenge for Iran. On one hand, Chinese outward M&A will empower Western multinationals with the financial resources necessary for new market development, such as joint-ventures with Iranian firms. Chinese owners may also be less deterred by lingering compliance and reputational risk issues that currently hamper Iran trade.

On the other hand, Chinese ownership poses a geostrategic challenge. Iran needs to carefully balance Western alliances with its relationships with Russia, China, and India. Chinese ownership of key Western multinationals will make that balancing act more complex.

This article was written by Esfandyar Batmanghelidj for Bourse & Bazaar on Oct. 25, 2016. Esfandyar Batmanghelidj is Executive Editor of Bourse & Bazaar.